Special Flood Hazards; Interagency Questions and …

1 Department of Homeland Security 500 C Street, SW Washington, DC 20472 W-08021 April 16, 2008 MEMORANDUM TO: FROM: Federal Insurance Administrator National Flood Insurance Program SUBJECT: Procedures Relating to Flood Zone Discrepancies The Federal regulatory agencies supervising federally regulated lending institutions must require their lenders to take certain actions to ensure buildings in high-risk areas known as Special Flood Hazard Areas (SFHAs), the areas subject to inundation by the base (1-percent-annual-chance) Flood , are properly protected, and Flood insurance is retained for the life of those loans.

2 These requirements are explained in the attached Federal Deposit Insurance Corporation Financial Institution Letter dated December 21, 2007, and the draft revisions to the document entitled Loans in Areas Having Special Flood Hazards; Interagency Questions and Answers, which is available online from the website Lenders obtain Flood zone determinations for the buildings for which they make loans or hold mortgages. Flood zone determination companies report to lenders the Flood zone information for the building based on the current Flood Insurance Rate Map for each community.

3 When the Flood insurance policy declarations page for the building shows a Flood zone other than the one reported on the Standard Flood Hazard Determination Form, lenders are concerned that the policy may be incorrectly rated. The Department of Homeland Security, Federal Emergency Management Agency (FEMA), understands Flood zone discrepancies are occurring because some WYO companies are no longer accepting the Flood zone determinations provided by lenders to rate Flood policies. WYO companies are either providing their own Flood zone determinations or requiring agents to determine the Flood zone.

4 As a result, lenders are frequently finding the Flood zone indicated on a Flood insurance policy declarations page is different from the lender s Flood zone determination, and they are seeking resolution. Write Your Own Principal Coordinators and the NFIP Servicing Agent David I. Maurstad Procedures Relating to Flood Zone Discrepancies April 16, 2008 Page 2 Effective May 1, 2008, WYO companies and the NFIP Servicing Agent are hereby directed to use the most hazardous Flood zone for rating when presented with two different Flood zones, unless the building qualifies for the grandfathering rule.

5 If the policyholder wants to dispute the high-risk Flood zone determination, procedures are available, including the Letter of Determination Review (LODR) and the Letter of Map Amendment. These are cited in the Code of Federal Regulations, (CFR) at 44 CFR , Review of Determination. More detailed information concerning the LODR process is available from the FEMA website #fldproc81. Information about additional options available to a property owner to appeal the lender s Flood zone determination is available from the FEMA websites and The attached document entitled Options Available to a Borrower for Appealing a Lender s Determination of SFHA can be provided by producers to their clients who believe that a lender may have made an error in identifying the subject building in an SFHA.

6 FEMA recognizes this new requirement may place an additional burden on the insured. However, it is most important for policies to be rated correctly, to ensure the NFIP collects the appropriate premiums. Thank you in advance for your support. Attachments cc: Vendors, IBHS, FIPNC, Government Technical Monitor Suggested Routing: Data Processing, Underwriting, Marketing Federal Deposit Insurance Corporation 550 17th Street NW, Washington, 20429-9990 Financial Institution Letter FIL-114-2007 December 21, 2007 Flood INSURANCE Managing Risks Associated with Lapses in Flood Insurance Coverage Summary.

7 Flood insurance is required for the life of a loan that is secured by improved real estate located, or to be located, in a Special Flood hazard area of a community participating in the National Flood Insurance Program. Often, an insurance policy lapses because the borrower does not renew it. Therefore, it is important for institutions to have adequate internal controls to ensure that borrowers maintain appropriate levels of Flood insurance coverage for the term of the loan. Distribution: FDIC-Supervised Banks (Commercial and Savings) Suggested Routing: Chief Executive Officer Compliance Officer Highlights: Flood insurance is required by federal law and is a common sense risk management tool for both lenders and borrowers.

8 Institutions are responsible for ensuring that borrowers timely renew their policies. Flood insurance premiums are not required to be escrowed if an institution does not require the escrow of other funds to cover other loan-related charges. However, escrowing Flood insurance premiums helps ensure that borrowers are aware of the cost of Flood insurance, and that such insurance is maintained. If Flood insurance coverage lapses, both borrowers and institutions are exposed to the risk of an uninsured loss from flooding.

9 That risk increases in situations where Flood insurance premiums are not escrowed. Therefore, it is important for institutions that do not escrow Flood insurance premiums to have internal controls in place to verify that borrowers are maintaining adequate Flood insurance coverage for the life of the loan. Such controls include: Monitoring notices from the insurance carrier about when a borrower s Flood insurance is due for renewal, and following up if the policy renewal is not received from the borrower; Commencing force placement procedures when the institution determines that required Flood insurance coverage is deficient or lapsed; and Checking Flood insurance policies to confirm that they were written for the risk zone noted in the Flood determination and, if not, resolving the difference.

10 Related Topics: Flood Disaster Protection Act of 1973, as amended FDIC Part 339 Loans in Areas Having Special Flood Hazards Interagency Questions and Answers Regarding Flood Insurance (Financial Institution Letter 77-97) Contact: Mira Marshall, Senior Policy Analyst, at (202) 898-3912 or or John Jackwood, Senior Policy Analyst, at (202) 898-3991 or Note: FDIC financial institution letters (FILs) may be accessed from the FDIC's Web site at To receive FILs electronically, please visit Paper copies of FDIC financial institution letters may be obtained through the FDIC's Public Information Center, 3501 Fairfax Drive, E-1102, Arlington, VA 22226 (1-877-275-3342 or 202-416-6940).